Background

Over the course of the last week. Treasury Secretary Janet Yellen has been making the rounds, letting everyone know that if the Congress does not raise the debt ceiling by October 18th, the US will fail to meet its debt obligations and it could lead to a recession. 

The Democrats, led by Senate leader Chuck Schumer, are eager to raise the debt ceiling as soon as possible, however they want Republican support. Democrats insist that because US debt had doubled under the Trump administration, the Republicans should stand with them to raise the debt ceiling.  The Republicans, led by Senate minority leader Mitch McConnell, want nothing to do with it.  They insist that the main reason the Democrats want to raise the debt ceiling is because it will help them pass the $3.25 trillion infrastructure package the President Joe Biden has presented. 

The Democrats have the power to pass raise the debt ceiling alone via reconciliation, however they refuse to go this avenue as it would force democrats to put a “hard dollar amount” on how much to raise the debt ceiling.  They want Republican’s to be “on the hook” with them in determining the amount to raise it by.

October 6th

S&P 500 has been down as far as 6.1% from its all-time highs on September 6th. Lots of reasons have been given to the selloff in the S&P 500 as have been given for the selloff in other indices (see Nasty NASDAQ here):

  • China slowdown
  • China/US relations
  • Fed Tapering
  • Poor expected earnings in Q3 and outlook
  • Delta Variant
  • Inflation

And……………………….

  • The US debt ceiling

Your S&P 500 trading guide

Today, before the 3rd vote on the increase of the debt ceiling,  Mitch McConnell marched into the Capital to make a deal with the Democrats, which would extend the debt ceiling to December and give the Democrats the time they need to go through the reconciliation process.  Democrats shooed McConnell away, however also suspended today’s vote.

Although traders have said they aren’t too worried about Congress failing to make a deal regarding the debt ceiling (they always do), it appears that some are taking “Just in Case” action, such as JP Morgan Chase. 

The most interesting, and telling, move of the day was in the S&P 500.  The large cap index was down 62 S&P points or nearly 1.5%  As news hit the wires that McConnell was going to offer a plan to raise the debt ceiling, the S&P 500 bounced aggressively. The index closed nearly +0.45%.  This leaves traders to question:

Was the main reason for the stock market selloff due to the possibility that the US Government will default come October 18?  If an agreement is reached, will stock markets continue to make all-time highs?

The timing of the McConnell proposal and the bounce in the S&P 500 was too coincidental.  On a 60-minute timeframe, stocks rallied to test recent highs and trendline resistance at 4368.  Support isn’t until the day’s lows at 4298.8.

Source: Traingview, Stone X

 

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On a daily timeframe, if it appears an agreement will be reached, the S&P 500 could move higher.  The 38.2% Fibonacci retracement from the September 6th highs to the October 1st low is 4378.3.   The 50% retracement is just above at 4411.1 and the 61.8% Fibonacci retracement level and the 50 Day Moving Average crosses at 4443.9.  However, if no agreement is reached and the US does default, support below is at the October 1st lows of 4272.2, followed by horizontal support at 4234.2 and then the 200 Day Moving Average at 4162.3.  In the event of a US default on October 18th, the more anticipated scenario (catastrophic according to Janet Yellen) would probably have the S&P 500 near 3200!

Source: Traingview, Stone X

The Next 11 Days

Although Mitch McConnell came to the Democrats with a proposal to raise the debt ceiling, which was quickly declined, it shows Republicans are willing to work with Democrats.  The S&P 500 went screaming higher after the wires picked up on the Republican proposal.  Does this mean that if an agreement can be reached on raising the debt ceiling, then the S&P 500 will resume its longer-term trend higher?  Watch this event closely over the next week and a half!

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